Charles Hugh Smith called the housing/debt bubble in 2005 when he started blogging on his site, Of Two Minds.
It helps to be right and since then, he’s grown his readership to 300k monthly visitors and published one of the best selling kindle books on Amazon in the investment category. Smith joins us today as a guest on Tradestreaming Radio.
Please join us to discuss his new book, An Unconventional Guide to Investing in Troubled Times.
We’ll hear from Smith about what he sees to be the underlying problems in our economy, how it will play out, and how he suggests investors position themselves for the future. (Hint: disruptive technology and hard assets both play a key role)
Listen to the FULL program
Investing in troubled times – with Charles Hugh Smith by tradestreaming
About Charles Hugh Smith
Charles Hugh Smith writes the Of Two Minds blog and is the author of eight books of fiction and nonfiction.
Read the Transcript
Transcript brought to you by Speechpad
I’ll leave it to Charles Hugh Smith to discuss exactly how he does that. He’s an investor in housing, personally. So understand that he comes with a particular set of experiences. I thought it was a very interesting interview. The book was also a great read. Check it out on Amazon.
Thank you for joining. This is Tradestreaming Radio. You can get our archives at the website tradestreaming.com. You can also find us on iTunes. Feel free to drop us a line, tell us what you’re thinking about the show. If you’re on iTunes, give us a ranking please. Give us a review. We would definitely appreciate it, as will others, to know if you’re finding value in this podcast.
We’re growing Tradestreaming. That means we’re launching courses based upon some of the content in these podcasts. So where the podcasts will always be free, we will then begin to provide more exclusive-type content where we’re talking to the office, we’re talking to these innovators and digging deeper to get more information on how to implement their trading strategies. Hugh Smith will probably also be joining us later on. I hope to get him to talk about investing in housing, whether that be single family or multifamily housing in the future.
Thanks again. We’re entirely grateful for your listenership here at Tradestreaming Radio, and hope to speak to you soon. Here’s Charles Hugh Smith.
You mention in the book that you’re not a formal economist, or you don’t have a financial background. Can you talk a little bit about your background?
Charles: Yeah, sure. Are we rolling tape here?
Zack: Yes, we’re rolling tape.
Charles: Okay. Yeah, hi Zack. The basis of my interest in the financial markets started from the housing market back in the mid 2000s, in what was clearly the bubble, but was being denied as a bubble. So I got into looking at charts and probing into the financial foundation of the housing bubble. Farther back in time, my university degree is in philosophy, which as you know, allows you a career choice of carpenter or cab driver.
Zack: Which did you choose?
Charles: I chose carpenter. But what it did do is it does teach you to think clearly and seek out some sort of internal logic to things. What’s funny is I run across a lot of people who also have a degree in philosophy, who have migrated to an interest in finance. For instance, Gonzalo Lira. So, that’s the long answer.
Zack: OK. So you’re looking at the bubble in the mid 2000s and you’re sort of one of the few lone voices out there raising your hand, “Hey I think there’s a problem here.” Where do you go from there?
Charles: Once you realized that the housing bubble was not really a housing bubble, but, in fact, a credit bubble, then it opens all these other doors to the underpinnings of the whole economy. Then you realize, wait a minute, it’s not just the housing that’s based on a credit bubble, it’s the entire economy and the stock market and the whole ball of wax.
Zack: It gets much bigger, right? You talk about the sovereign debt bubble, as well.
Charles: Absolutely. Once you start looking at the huge leverage in the private sector, and now we’ve absorbed a lot of that and blown up the public sector debt. The overall debt is still rising. The overall debt, public and private, that is weighing on the economy, it continues growing, even thought the economy is flat lined. So, yeah, that’s a problem.
Zack: So what do you do with your creative juices at that point? You start blogging? You started Of Two Minds then?
Charles: Yeah. I started the blog in May of 2005 and attracted a readership through some mysterious process. I think it was based on people’s interest in housing. Being right helps
Zack: It always helps. Can you talk about how big that audience is?
Charles: Well I get about 10,000 daily visits on my main blog, and the site is often distributed to Seeking Alpha, Zero Hedge, and a bunch of other places. Then I have an RSS feed of about 3,500. So I guess the daily audience is somewhere between 15,000 and 20,000.
Zack: That’s great traffic. So initially in 2005, if you’re one of the lone voices in the desert, or whatever, sort of saying, “Hey, there is a really big problem here.” Was the initial audience sort of, for lack of a better term, people of the same ilk? People who were willing to go against the flow? Because that certainly wasn’t common thinking back then.
Charles: Yeah, that’s right. Those who were skeptical of anything that rises that fast being sustainable, but those people were definitely in the minority. Of course, all of us who own whatever asset is in a bubble, it gives us a warm and fuzzy feeling to see that gigantic increase in our equity. It’s kind of hard to pull back and go, “Jesus, if this is not sustainable then what should I do?”
Zack: So the book that you produced, at what point in the process did you decide to say I’m actually going to sort of codify my thoughts here?
Charles: Back in about 2008, when things started destabilizing, and we started this whole process of the Fed and the federal government papering over the financial ills of the nation. I decided to attempt a global overview of our problems, and so I wrote this book called “Survival Plus: Structuring Prosperity for Yourself and the Nation.” That got published in fall of 2009. I sold a few thousand copies and the response was good, but people said, “Gee, it’s too theoretical. I want more practical stuff.” So then I thought, “Well, gee, what I really should do is write a book about investing. Not investing in Wall Street, but investing in the rest of the economy.” So, that’s the beginning of this book, “An Unconventional Guide to Investing in Troubled Times.”
Zack: I found you as one of the top sellers on Amazon. Is that still the case?
Charles: I didn’t look today, but I think I . . .
Zack: Oh, come on. You did. What’s your sales ranking?
Charles: No, it’s been declining. I think I’m still in the top ten of the Kindle books within investing, but I’ll have to look.
Zack: So let’s talk about the structural problems. I think myself, as you guessed correctly, and my audience, I think we’re probably interested in your advice on what to do next. But let’s talk about where we find ourselves in history today.
Charles: I think the core of what I argue in my book is that we’re entering an age of tremendous instability, which we’re seeing with these wild swings; up 400, down 400. This is not a healthy market. I think what the cause of that is that the fixes are all superficial. We’re not draining the swamp or cesspool of impaired debt. We’re not really reforming the financial sector. So people . . .
Zack: Is that a structural issue? The fact that the fixes are being floated the market participants, the same people who got us into this?
Charles: I think so, because they’re hoping and praying they can fix it the way they did the Savings and Loan fix back in the early 1990s. Which was, they just sort of flooded the whole system with liquidity and the allowed the banks to write off bad debt like a little bit a time. But at that time, the amount of debt was modest compared to today. A lot of that was basically bad debt that had been loaned to South American countries which defaulted. So if you’re going to deal with a couple of billion in bad debt, or even 100 billion, you can do that kind of bleeding it off a little bit at a time. When you’re dealing with trillions in bad debt, it’s not going to work.
Zack: Can we talk about where this morass of instability and there’s some chaos going on. What are we shifting to? What type of environment do you expect to see in the near future?
Charles: This is just my read; is that because we spent four years trying to fix fundamental problems with like wallpaper, phony reforms, and flooding the market with all this liquidity; basically bogus fixes that haven’t worked. Now people have lost faith in that. I think that’s why the markets are rising and crashing in a down trend is people are going, “You know what? The Fed is not able to fix the economy and neither is the federal government.” So I think we’re in for a couple of years of instability which will only be resolved when we have a full breakdown and the thing destabilizes, the dam of bad debt breaks and it’s all washed away, and we can all start over.
Zack: Lot of haircuts?
Charles: Lots of haircuts. So I think that like I wrote today, the loss of faith in the stock market as a store of wealth building. I think that’s what people are getting wise to is, if this whole thing is rigged, and the rig is not working, then why the heck am I exposing myself to that risk? I know that a lot of people’s money is trapped in 401(k)s and IRAs, and they can’t necessarily go out and buy physical gold or some other asset. So they’re kind of stuck in the markets. But what I try to remind people is cash is a position, too. There’s nothing wrong with staying in cash for a couple of years.
Zack: Even if . . .
Charles: Yeah. Even though you’re not earning anything, but you’re not going to lose 50% or 60% of your money either.
Zack: I think also the John Bogle’s, for everything he introduced, in terms of passive investing and avoiding overtrading, people seem to doubt the need to make changes. Yet looking at the way the market’s going to go down from here and sitting in exactly where you are in today doesn’t exactly make sense either. I always feel like he did some what of a disservice saying that you just have to sit still and bet on the markets going up in the future. They may no go up in the near-term future.
Charles: Exactly. If we look at cycles, and I’m sure a lot of your listeners are aware of the contralti of debt contraction and expansion cycle and business cycle and there’s a lot of cycles out there, and a lot of them kind of show a bottom around 2013 or 2014. That sort of jives with what we are seeing now in the market destabilizing and this belief in the system falling off. You know, Zack, one of the things that I write about that you might be interested in because you’re interested in the impact of technology on investing, is what else can people do with their money? The Internet has opened up a lot of vistas. We’re not trapped in Wall Street anymore, although Wall Street would like us to be stuck in Wall Street. For instance, there’s peer- to-peer lending.
Zack: Like the Prosper.coms of this world?
Charles: Yeah, prosper.com. You go, “Well, wait a minute, isn’t that risky?” What I’m saying is, “If you think the stock market’s going to go down by 60% no matter what anybody does, how much risk is that?”
Zack: Right.
Charles: At least with prosper.com, or if you’re going to make a loan to an actual legitimate business that you can investigate, then at least the risk is transparent. That’s the problem with Wall Street, is we’re told everything’s low risk but its all opaque. I’m skeptical of the idea that Wall Street tells us we can buy shares in a mining company 6,000 miles away and it’s all going to be great, low risk. How do we know that?
Zack: It’s not only opaque, but as you say in the book, it’s also correlated. When everything hits the fan, those assets that you bought to sort of diversify away your risk, they all go down in unison, right?
Charles: That’s right. You’re absolutely right. The risks, it’s almost like there’s only one trade in the world, and the only thing on the other side is the U.S. dollar, which a lot of people hate for good reason. But there’s an argument to be made that the dollar could strengthen. Not only in a cyclical kind of analysis, but the idea that there’s a lot of debt denominated in dollars. If things go south, and people need to start paying off debt and margin calls and stuff, they’re going to need dollars.
Zack: That’s interesting. Look at the way Treasuries reacted after the downgrade. I thought that was kind of interesting.
Charles: Yeah. People kind of tend to forget that in FOREX, the foreign exchange, it’s like $2 trillion or $3 trillion worth of currencies exchange everyday. There’s about $50, $60 trillion in debt in the United States, the global economy is like $100 trillion. When you start bouncing around numbers like that, then the Fed printing $600 billion; you realize it’s kind of a pop gun.
Zack: So let’s get back to that technology piece. That was interesting. So you’re talking about technology here as an enabler of new investment platforms, right?
Charles: Yeah.
Zack: OK. So we have peer-to-peer lending. I know you mention in the book, local stock markets. It’s actually something I blogged about today. Can you talk a little bit about the platformization of what the Internet’s doing?
Charles: I would characterize it as decentralization. That over the last 30 years, we’ve had this increasing centralization of capital and also of production. So globalization, what does that even mean? It means free capital flow where the bigger players run things; and also that production is now centralized so the entire industry is dependent on these factories spread around the world. As we saw with Fukishima, when or two factories go down, then the entire auto industry globally is crippled. So this centralization theme, I think, is going to be a trend that’s going to reverse. So just we see what I call de- globalization, people are going to start looking around and realizing that to lower their risk, they’re going to need to decentralize their investments and look for local investment opportunities and not just centralize all their money in Wall Street.
Zack: So the Internet is a great enabler of decentralization. It’s done that in a variety of different industries, right?
Charles: Yeah, I think so. It’s crippled financially because we’ve been led down the wrong path by the Fed and the federal government. But I think there’s a lot of opportunity for enterprise and technology. For instance, the technologies that are allowing high-tech fabrication within workshops. This kind of technology could lead to all kinds of new enterprise and production. Those, I think, are the opportunities to be looking for. Not some mine 5,000 miles away or some kind of Wall Street investment which claims to be low risk, but which is, in fact, high risk.
Zack: I guess part of that issue is the securitization of a lot of these investments, right? So if I wanted to invest in gold, Wall Street made it very easy for me to buy an ETF, an exchange traded fund that trades it. You sort of seem to say that’s not the best way to go about things. If you’re looking at taking your money out of Wall Street and buying assets, really take it out of Wall Street and buy the assets directly, right?
Charles: Yeah, it’s possible. By Wall Street, I mean like mutual funds, money management, and that kind of thing. Obviously if you want to buy a stock in a company that you actually know, you’re in the stock market, but you’ve actually invested in a specific firm that you know. For instance, if you want to own a mine, like a copper mine or gold mine; why not buy one that’s based in Nevada that you could actually visit. At least you can do some research and find out if it’s legitimate and that’s not going to be expropriated by the next government in whatever country that some Wall Street based mine is based in.
I think what we’re really talking about it risk management. That’s like a catchphrase, but what exactly is risk management when the whole world trades as one? So obviously, the only way to really manage our risk is to know something seriously real about what we’re investing in and not just take Wall Street’s word for it. If you can invest in actual companies that have an income stream and the risk is transparent; then I think that’s a lot better strategy than gambling that the opaque risk is, in fact, low.
Zack: It’s easier said than done though. The whole idea of securities laws were to prevent smaller individual investors from being taken for a ride in private companies. Everything’s opaque, right? I think part of the struggle we’re having is the language and how we describe risk. It’s a very hard process even for professionals.
Charles: Yeah. Absolutely. I think, Zack, what we’re going to be seeing in the next five to ten years, is we’re going to need new models of investing. There are some tendrils of movement out there, like you just blogged about those local stock exchanges which would allow for small investors to invest in local companies within their own state. We do need new models that would allow us to invest in local, productive assets.
Zack: Henceforth, technology plays a major role.
Charles: Absolutely. It allows for more transparency that we can actually look at things, as long as the books aren’t cooked or whatever. That we have much more accessed information and that we may be able to pool our investment money with other investors outside of the Wall Street machine.
Zack: Sort of like the crowd-funding type concept. Do you ascribe to the whole “Slow Money” Movement?
Charles: Yeah. I think what we need is an explosion of innovation, and that would be one innovation. We’ve got peer-to-peer lending, perhaps local exchanges. I think we need a mix of all kinds of those things, because that’s the only way we can limit risk is to have true diversification. I think another thing I try to stress is that you can also invest in your own business.
Zack: I was just going to ask you about that, also, because in the book you talk about technology playing a role in helping you to create your own revenue streams online. That’s really easy nowadays or it’s technically really easy.
Charles: Yeah. We have tools. Those of us that are just small bloggers, as you know, we have access to tools which would have cost a fortune even 10 or 15 years ago. We tend to think that the WalMarts of the world control everything, but actually there’s a lot of money to be made by siphoning off business from the global, multinational corporations by doing a better job locally.
Zack: So you chose your own path, and I don’t know if you’re supporting yourself solely from the revenues or royalties off your book; of creating content. You built a community, and then you’ve built two books, or monetization engines to help you monetize that, to put it bluntly.
Charles: Yeah. I also have a real-world business. My wife and I manage apartments and I maintain them. So I actually do real work in the real world. I look at it as diversifying. Like if you can have a couple of different income streams in your life, then that’s a very fundamental form of diversification.
Zack: Is that what the new retirement looks like? People who are pushing off retirement because they were building an equity portfolio that didn’t quite get there. It’s not a Panacea, but is that one solution? Just to keep working longer with more hobbies, more monetizable hobbies?
Charles: I think so and not relying just on a pension or your social security; or things that we thought were safe, but which, in fact, might be at risk. I guess I’m positive because I think getting out there and doing stuff and starting an enterprise, even a little one, is fun. I don’t think it’s like a drag or a horrible burden. Its adds a lot to your life to have a little business, even if it only makes a couple of thousand a year.
Zack: For sure. The thing is, most small businesses fail, right? We’ve been taught there’s this whole passive investing engine which is Wall Street, mutual funds and ETFs. You sort of just put your money there and over long term, it’s going to grow. All of a sudden, we’re saying either that was real for a specific period in time or it’s now currently a myth. As Westerners, I guess, we’re not necessarily thinking in those terms.
Charles: Yeah. I think, Zack, that’s why I think the next 20 years will be really different from the last, not just 20, but actually the last 60. What we’re seeing is the end of the great, post-World War II boom. Models that worked for all those decades will no longer work. So, the idea that being in cash to preserve your capital just by being in cash, that’s alien, as you say, to the passive-investing thing. But it may turn out to be that that’s the wisest course and investing in small business that’s been shunted aside or considered a risk compared to globalization. Well, maybe the whole globalization thing is unraveling and local business will be much less risky, form of income.
Zack: So higher education plays a role in that, right? We were taught that you study hard, you go to school, you go to a good university, you’ll make more in the future. That’s an investment and there’s a return on investment. People are sort of doubting that that return exists anymore. Would you tell people not to send their children into college in these days?
Charles: Again, one of the things I stress is, just think about true diversification. How can you create several different income streams? Just trying to get a really good job in a shrinking economy, that’s putting all your eggs in one basket. I mean, higher education is an asset, but if you can include some other skills, like entrepreneurial skills and thinking independently. It’s not just the degree itself., its are you learning to be adaptable and thinking about creating several different forms of income, rather than trying to just get a “secure” job. I think that’s going to be a strategy that’s not going to pay off.
Zack: How about you? Would you do the same thing over again?
Charles: Yeah. I myself would because I’m a workaholic. I do confess that. I kind of worked my way through college. So, I actually had two educations because I was working for a building contractor. So by the time I got out of college, I had a degree, but I also had a lot of skills in the real world. That’s another way to look at it is not to put all your hopes on a university degree, but look at what else you can do for income and also for life satisfaction. If you think that you’ve got to have a secure job and millions of dollars set aside in retirement for a happy life, I think you need to redefine what wealth and happiness are.
Zack: One question that I ask all participants on the podcast, as we conclude the podcast, is what resources do you go to online or offline that you’re reading to sort of help your own investing practice? Resources that you come back again and recommend to other people.
Charles: Well I don’t want to sound too highfalutin, but I think that it’s important to know the status quo, what they think. The sort of “financial leaders” and all that kind of . . .
Zack: So mainstream media?
Charles: Yeah. I think that the Wall Street Journal is like a good guide to the conventional thinking. You have to know the conventional thinking to think outside of it. Then this quarterly journal called Foreign Affairs, which is like the conventional view of globalization. In terms of technical stuff in the stock market, thechartstore.com has a ton of charts. It’s a subscription service, but if you’re into charts and think they can help you chose a low-risk strategy, then I think there’s a lot of value there.
Zack: So you have your own site, Of Two Minds. What other non-traditional sources are there do you find yourself going to?
Charles: My blog list certainly includes Mish Shedlock, Zero Hedge, and Karl Denninger and, of course, for amusement, Jim Kuntsler. I’m in correspondence with all these guys. So, these are also people that I consider colleagues.
Zack: That’s great.
Charles: Yeah.
Zack: Hey, Charles, I really appreciate your participation. That was a great interview, and I guess this concludes the formal part of the discussion.
Charles: Thank you so much, Zack.
More resources
- Of Two Minds
- An Unconventional Guide to Investing in Troubled Times (Amazon)
- Other books authored by Smith (Amazon)
- Dangerous Minds’ Richard Metzger interviews Smith (Dangerous Minds)